Problem 1:
a. Find the present and future values of the following cash flows:
|
Time (years)
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Cash flow
|
-100
|
100
|
100
|
100
|
125
|
125
|
The interest rate is 10% compounded quarterly.
b. Suppose that you borrow $450,000 for a mortgage that is amortized over 30 years with monthly payments.The interest rate is fixed at 5% per year for the term of the loan. How much of the second payment is interest, and how much is principal?
Note: You will have to find the amount of the monthly payment and do an amortization schedule for two periods to answer this question.On the other hand, if you can calculate the balance at the end of one period, the amortization schedule is not necessary.
Problem 2:
Suppose that you make an investment of $100 and generate cash flows of $50, $40, $40, and $15.
a. If the required rate of return is 10%, what is the present value of this stream of cash flows?
b. Given the cash flows, what is the rate of return earned in each period?
c. If the present value is greater than zero, and the rate of return is greater than what is required, should the firm make this investment?State this in terms of the objective of the firm.
Problem 3:
Complete the following problems on bond valuation:
a. A bond has a maturity value of $1000, six years to maturity and a coupon rate of 7% where interest is paid semi-annually.If the market rate of interest is 8%, determine the current price of the bond.
b. Say that a bond has a maturity value of $1000, five years to maturity, and a coupon rate of 4.5% paid annually.If the bond was purchased for $1120, what return will you earn if the bond is held to maturity?How is this methodology different from Problem #2, part (b)?
c. Suppose you bought the bond for the price in part (a) and then sold the bond for $1150 at the end of two years.What return did you earn during the two years (i.e., holding period return)?
Problem #4
A bond has a face value of $1000, a coupon rate of 5% (paid semi-annually) and a time to maturity of 10 years.The bond is convertible to 50 shares of common stock.
a. If the market rate of interest is 4.75%, find the straight bond value for this security.
b. If the current market price per share is $22.50, find the conversion value for the bond.
c. Determine the intrinsic value for this bond.
d. If there is a premium attached that is equal to $5, what is the market price of the bond?
e. Describe the difference between a callable and a putable bond.
Bonus:Find the present value of a stream of cash flows where the payment is at the end of every third year and this process lasts forever.The interest rate per year is 5%.